Bail-out will cause bank shares turmoil

Investors in Britain's biggest banks were bracing themselves for fresh turmoil on the markets today as the Government announces a second rescue package guaranteeing £100bn of new lending.

Turmoil: Alistair Darling is expected to unveil a new rescue package

Chancellor Alistair Darling is expected to unveil a series of measures aimed at kick-starting lending between banks, consumers and companies after October's £37bn bail-out failed to deliver.

Treasury officials hammered out new proposals with bank bosses over the weekend and were preparing to make the announcement before markets open today.

The main plank of the rescue package is an insurance scheme funded by the taxpayer, which will pay out to the banks if the value of their 'toxic assets' falls below a certain level.

The unknown scale of the bad debts from a string of disastrous investments during the credit boom has destroyed the confidence of banks to lend.

There has been a breakdown in trust and the insurance scheme is aimed at restoring this by covering any losses if the value of the bad loans fall below a certain level.

Up to £100bn would be guaranteed as part of this voluntary scheme, which banks would pay to join.

The Government is also expected to confirm details, first revealed in the Daily Mail, that the business plan for state-owned Northern Rock will be revised to allow it to make new loans.

As part of the series of measures there will be widening of the credit guarantee scheme to guarantee loans to non-banks, such as businesses, directly, and a new special liquidity scheme.

There is also expected to be a separate announcement about Royal Bank of Scotland.

It is 58% owned by the government, but will become 70% government owned, which will effectively be a full nationalisation.

The proposal is that £10.5bn of the preference shares the state holds in both Royal Bank of Scotland and Lloyds could be exchanged for a bigger stake in the banks. But Lloyds is unlikely to participate.